Where Did My Paycheck Go? Understanding Income, Paychecks & Taxes

Scenario: HOW CAN THIS BE????? You make $10 an hour and work for 10 hours…. How much will your paycheck be? $100 ? ($10 x 10) WRONG! It is actually closer to $80.00 HOW CAN THIS BE????? A certain percentage of every paycheck is DEDUCTED for taxes. Let’s learn more…

What are Taxes? Taxes are required payments of money to governments That are used to provide public goods and services which benefit the community as a whole.

What are “public goods and services”? 1) Benefits that cannot be withheld from those who don’t pay Even if you do not make enough money to pay taxes, you can still count on the fire department to put out the fire in your house.

“Public Goods and Services” cont. 2) Benefits that may be “consumed “ by one person without reducing the amount of the product or service available for others. It will not use up all the fire service if they put out the fire in your house!

Other examples of public goods and services are: National defense Streetlights, roads and highways Public services including welfare programs Public libraries Law enforcement Monitoring and regulating trade and the economy.

How does the government collect taxes? Sales Tax Property Tax Payroll Taxes (this is the MAIN way) Social Security Tax (also called FICA) Medicare Tax Federal Income Tax State Income Tax

Social Security Taxes How much? 7.65% of wages Taxes collected to fund federal programs which provide: Retirement benefits For workers when they reach age 65 For dependents of retired workers For the disabled and their dependents How much? 7.65% of wages

Medicare Tax How much? 1.45% of wages Medical benefits Taxes collected to fund federal programs which provide: Medical benefits For individuals when they reach age 65 Spouses of retired workers How much? 1.45% of wages

All income from wages, salaries, commissions and tips is taxable. Income Taxes All income from wages, salaries, commissions and tips is taxable. Federal – supports national programs State – supports state programs (WA has sales tax instead of income tax!) How much? Varies. People who earn more pay a higher percentage of their income in income taxes. (“Tax Brackets”)

These taxes are the reason you take home less than you make Your GROSS PAY is the amount of money you earn before payroll deductions. Your NET PAY or TAKE-HOME pay is the amount you receive after deductions. Gross Pay – Deductions (Taxes) = Net Pay

How does your employer know how much to withhold from your paycheck? You complete FORM W-4 (see example) Your employer uses FORM W-4 to determine what amount of income tax they should deduct (or “withhold”) from your paycheck These withholdings will act as a “pay-as-you-go” system for paying your federal income taxes each year.

The amount of federal income tax withholding depends on If you are married or single How many dependents (children) you have Any exemptions that you claim Any additional amount you want withheld (investments, benefits, etc.)

In January… Your employer will provide you (and the government) with your W-2 Form. It reports your wage, salary, tips and income taxes paid during the previous year.

By April 15th… You use FORM W-2 to complete your Federal Tax Return (Due April 15th) If over the course of the year you paid more income tax than necessary, you will receive a tax refund from the government. If you paid less income tax than necessary, you will have to make a payment to the government.

What’s next? Tax Terms Notes & BINGO (What are tax deductions, credits and exemptions?) And then…we get to learn how to calculate our OWN taxes!!! WOOHOO!